10 Top Small-Cap Stocks to Buy for the Long Term

The Morningstar US Large Cap Index is up twice as much as the Morningstar US Small Cap Index so far this year; large-cap stocks have outperformed small-cap stocks during the trailing three-, five-, and 10-year periods, too. After such great underperformance, some say it may be time for small-cap stocks to take the lead, especially as recession fears begin to fade. In fact, Morningstar chief U.S. market strategist David Sekera notes that small-cap stocks are, across all investment styles, trading at much more attractive prices than large-cap stocks.

The small companies on Morningstar’s list of the top small-cap stocks to buy for the long term share a few qualities:

• The stocks are from companies that all earn Morningstar Economic Moat Ratings of wide or narrow; these companies have advantages that should allow them to keep competitors at bay.
• The management teams at these companies earn a Morningstar Capital Allocation Rating of Standard or Exemplary, suggesting that the balance sheet and investment decisions are well managed.
• These stocks look undervalued, which means they’re trading below Morningstar’s fair value estimates.
• These stocks land in the small-cap portion of the Morningstar Style Box.

10 Top Small-Cap Stocks to Buy for the Long Term

Here are the most undervalued stocks that Morningstar’s analysts cover that land in the small-cap portion of the Morningstar Style Box, earn Morningstar Economic Moat Ratings of narrow or wide, and garner Standard or better Morningstar Capital Allocation Ratings as of June 15, 2023.

1. Hanesbrands HBI
2. Lyft LYFT
3. Sabre SABR
4. AMC Networks AMCX
5. Nordstrom JWN
6. Lithia Motors LAD
7. Compass Minerals CMP
8. Comerica CMA
9. Asbury Automotive Group ABG
10. Adient ADNT

Notably, all of the names on our list of the top small-cap stocks to buy have High or Very High Morningstar Uncertainty Ratings. The higher a company’s uncertainty, the less predictable its cash flows are. By their very nature, smaller companies are more likely to have higher uncertainty. To compensate for this, it’s especially important to buy small-cap stocks at prices that are well below what they’re worth.

Here’s a little more about each of the top small-cap stocks on our list. Data is as of June 15, 2023.

Hanesbrands

• Price/Fair Value: 0.23
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Morningstar Capital Allocation Rating: Standard
• Morningstar Style Box: Small Value
• Industry: Apparel Manufacturing

The cheapest stock on our list of the top small-cap stocks to buy for the long term, Hanesbrands is a remarkable 77% undervalued according to our metrics. A market leader in basic innerwear, the company made headlines when it eliminated its dividend in early 2023 so it could focus on reducing debt. Although management reiterated its bleak forecast for 2023 in its recent earnings update, we expect profit margins to improve significantly by the end of this year, says Morningstar senior analyst David Swartz. We think the company’s Champion brand has growth potential, and we expect consumer replenishment of innerware to pick up as inflation ebbs. We think Hanesbrands stock is worth $20 per share.

Lyft

• Price/Fair Value: 0.33
• Morningstar Uncertainty Rating: Very High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Value
• Industry: Software—Applications

The only technology stock on our list of the best small-cap stocks to buy, Lyft looks about 67% undervalued relative to our $32 fair value estimate. Lyft’s results were good in the latest quarter. Nevertheless, we don’t expect Lyft to take market share from Uber but rather to maintain its number-two position in the U.S. duopoly ride-hailing market, says Morningstar senior analyst Ali Mogharabi. In fact, if Lyft can improve its profitability, it would be an attractive acquisition target, he argues. Plus, Lyft stock is a bargain.

Sabre

• Price/Fair Value: 0.32
• Morningstar Uncertainty Rating: Very High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Value
• Industry: Travel Services

Sabre stock is 68% undervalued relative to our $10.50 fair value estimate. Demand, profitability, and liquidity showed improvement in the latest quarter. “Despite material near-term economic and credit market uncertainty, we expect Sabre to maintain its position in global distribution systems over the next 10 years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents,” notes Morningstar senior analyst Dan Wasiolek. In fact, Wasiolek calls shares of this small company “meaningfully undervalued.”

AMC Networks

• Price/Fair Value: 0.44
• Morningstar Uncertainty Rating: Very High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Value
• Industry: Entertainment

AMC Networks stock is about 56% undervalued. The company has transformed itself from a minor cable channel showing classic movies into a platform for original scripted content that includes titles such as Breaking Bad and The Walking Dead. This past quarter, streaming growth offset weakness in the firm’s cable business, observes Morningstar senior analyst Neil Macker. Macker doesn’t think that the company has the financial resources it needs to function as a strictly steaming business and therefore suggests that the Dolan family, which controls the company, consider a merger. We think shares are worth $27 apiece.

Nordstrom

• Price/Fair Value: 0.51
• Morningstar Uncertainty Rating: Very High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Value
• Industry: Department Stores

Nordstrom stocks trades 49% below our $40 fair value estimate. Morningstar senior analyst David Swartz calls Nordstrom a “top operator” in the U.S. apparel market with a loyal customer base, and we assign Nordstrom a narrow economic moat rating. Admittedly, the company’s recovery postpandemic has been rocky. Nordstrom earnings for the recent quarter were mixed, with sales falling slightly more than we expected, but gross margins were above our estimates and last year’s actuals. We think the company is on track and shares are very undervalued.

Lithia Motors

• Price/Fair Value: 0.51
• Morningstar Uncertainty Rating: High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Value
• Industry: Auto & Truck Dealerships

The first auto-related stock on our list of the best small-cap stocks to buy for the long term, Lithia Motors stock is 49% undervalued. The company is the largest auto dealer in the United States, with stores in 28 states. Morningstar strategist David Whiston expects Lithia to continue to grow quickly for a long time to come, given that it is the only large publicly traded dealer operating in rural markets; many Lithia stores have no competitors within 100 miles, adds Whiston, which gives Lithia pricing power. The stock is also a favorite with Oakmark’s Bill Nygren. We think Lithia Motors stock is worth $507 per share.

Compass Minerals

• Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Wide
• Morningstar Style Box: Small Growth
• Industry: Other Industrial Metals & Mining

The only wide-moat company on our list of top small-cap stocks to buy for the long term, Compass Minerals stock trades 46% below our $65 fair value estimate. The firm produces salt and specialty potash fertilizer, and its portfolio of cost-advantaged assets is “enviable,” according to Morningstar strategist Seth Goldstein—and they underpin the company’s wide economic moat rating. First-quarter results and the outlook for the year were solid. “We view the current price as an excellent opportunity for long-term investors to pick up Compass Minerals shares with a solid margin of safety,” concludes Goldstein.

Comerica

• Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Value
• Industry: Banks—Regional

Comerica is a commercial-focused middle-market bank doing business primarily in Michigan, California, and Texas. Morningstar strategist Eric Compton says that the bank has been an above-average underwriter in the commercial space, which should result in credit cost advantages over time. The bank is facing some potential legal and regulatory issues that we currently view as manageable, he adds—though admittedly, this does increase the chance of surprise regulatory and legal issues in the future. Comerica stock is 46% undervalued relative to our $76 fair value estimate.

Asbury Automotive Group

• Price/Fair Value: 0.56
• Morningstar Uncertainty Rating: High
• Morningstar Capital Allocation Rating: Stable
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Value
• Industry: Auto Part & Truck Dealerships

Asbury Automotive Group stock looks cheap as it trades 44% below our $396 fair value estimate. A regional collection of auto dealerships, Asbury had a tough first quarter. “It should not be surprising that dealers’ earnings are declining year over year as used vehicle profitability remains challenged due to expensive inventory procurement costs, while new vehicle profitability gradually comes off record highs from the chip shortage, argues Morningstar strategist David Whiston. We think that the company’s size, focused acquisition strategy, and diverse revenue streams should allow it to grow at the expense of smaller dealers over the long term.

Adient

• Price/Fair Value: 0.56
• Morningstar Uncertainty Rating: Very High
• Morningstar Capital Allocation Rating: Standard
• Morningstar Economic Moat Rating: Narrow
• Morningstar Style Box: Small Growth
• Industry: Auto Parts

The last name on our list of top small-cap stocks to buy for the long term, Adient is the leader in the automotive seating market. Seating isn’t a commodity market, as some might expect, says Morningstar strategist David Whiston. In fact, Adient only has one significant global competitor. After an earnings miss last quarter and a disappointing outlook, we maintained our $68 fair value estimate, expecting that continued cost reductions and (eventual) improving macroeconomic conditions will allow Adient to reach profitability that’s in line with its main rival. We think Adient stock is 44% undervalued.

What Do Morningstar’s Ratings Mean?

Here’s a rundown of the Morningstar ratings and metrics we considered when compiling the list of the top small-cap stocks to buy for the long term.

The Morningstar fair value estimate represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum. Learn more about how Morningstar values stocks in Morningstar’s Guide to Stock Investing.

The Morningstar Capital Allocation Rating is an assessment of how well a company manages its balance sheet, investments, and shareholders’ distributions. Analysts assign each company one of three ratings—Exemplary, Standard, or Poor—based on their assessments of how well a management team provides shareholder returns.

The Morningstar Economic Moat Rating gauges how likely a company is to keep competitors at bay for the foreseeable future. Companies that we expect to maintain their competitive edge for two decades or more are assigned a wide economic moat rating; those we expect to remain competitive for at least a decade earn a narrow economic moat rating; and those that have yet to carve out competitive advantages earn an economic moat rating of none.

The Morningstar Style Box is a nine-square grid that provides a graphical representation of the investment style of stocks, bonds, or funds. Based on a series of inputs—including a company’s historical and long-term projected growth and its historical and forward-looking price multiples—a stock is classified as either a value stock, a growth stock, or a core stock. A stock is also classified as either small-cap, mid-cap, or large-cap based on its market capitalization.

How to Find More Top Small-Cap Stocks to Buy

Of course, there are many other criteria that investors can use to find small-cap stocks to buy for the long term. Here are some tools to find more ideas to research further:

• Investors can use the Morningstar Investor screener to create their own list of small-cap stocks that meet their specific criteria. Set the Investment Type to stocks, and then choose what market capitalization threshold you’d like in the Criteria section. You can then refine your search for small-cap stocks even further by adding valuation, profitability, and/or other requirements. You can also screen your list of small-cap stocks by Morningstar Rating or economic moat.
• Investors who’d rather invest in small-cap stocks through a managed product have a few tools at their disposal. Begin your research with a list of highly rated small-cap funds that’ve kept a lid on volatility. Or review our full lists of small-value funds, small-blend funds, or small-growth funds. More interested in exchange-traded funds? No problem: Peruse our lists of small-value ETFs, small-blend ETFs, or small-growth ETFs.

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